Firm Objectives and Decision Making Under Uncertainty

Managerial Economics and Dealing with Uncertainty Chapters 1 & 2

Dear Students, I would like to welcome you all to BUS 640. This class will teach you about the basic under pinning are of business. Most business students don't realize that every disciplines theory come from economic micro and managerial economics. That is why taking economics is mandatory for business students. If you don't know the theory, then you can't understand how businesses run. Just for your information, most of your CEO's have degrees not in business but in economics because they need the theory to run their businesses.

As for what to expect in your Week 1 assignments is more of a finance introduction which illustrates techniques that businesses use to analyze (whether or not) the firm is making a profit or analyzing whether or not a project a firm is about to undertake has the potential of being profitable. In making those assessments firms apply two procedures that you will learn in our Week 1 assignments. The first one if applying a Present Value analysis in Question 1 of Assignment 1. Then the second question is where firms apply in making a project decision what is called "Expected Net Present Value" or (ENPV) for short. This assessment makes more for a statistical assessment to create an annual Present Value (PV) projection and it also includes applying a study of its Standard Deviation (SD). This introduction will get your numerical juices going so you will quickly understand that this class is a numerical based class and where the verbal analysis is merely a supplemental procedure.

 Also, these same topics are also examined in both discussions. 

Chapter 1

There are two major economic studies either dealing with Macro or Micro economics. Macro economics of the study of the whole economy as it is referred; is not what we will study in this

class. Micro economics which is how individuals and businesses react within the market place is what micro economics is all about. This study is at the very heart of Micro and Managerial Economic theory of which you will study this term. The goal of managerial economics is for firms to learn how to maximize profits and minimize expenses.

We must begin to think as economists, or as accountants do in Managerial accounting within several of the following chapters. To deal with the business at hand, we in economics and accountants see the firm in a certain way, or an economic way of thinking. Most people don’t realize is that accounting got its foundational framework from economics and in particular a man called David Ricardo. Ricardo being a businessman and investor during Adam Smith times, and a student of Smith, came up with the economic theories which lie within this text.

So, thanks to Ricardo, today there is an economic way of thinking which you will learn in our class. For example, inflows are seen as revenues to the firm and outflows are referred to as costs or in accounting expenses of the business. What is left over for the entrepreneur is referred to as profit. Economists see positive profits as driving the business forward and negative profits as a signal to the entrepreneur that he may have to change his business plan, or eventually leave the business.

A model to an economist, like the equation above is one that not only businesses use, but one that began with Ricardo. Most of these models came from economic thinking, either in the form of a mathematical equation or a graph or both, which is how economists create their ideas on how businesses or individuals act, in this economic world. Many are simplified examples of how the world operates to them, and how they can predict

future outcomes.  Yes, we live in an uncertain world, however, economists create models where they can project them into the future to reduce the effects of

uncertainty, and learn more from how businesses and individuals act in the market.

Scarcity is another issued who economists back to Adam Smith, outlined to be the reason for price rising of falling taking place within the market. As products or services becomes scarce their price rises but as product become more available, then the price of a product or service will fall. Marshall, in fact, placed these two Price on the Y axis and Quantity on the X axis to create a graphical solution of how the market place works, calling it using Adam Smith’s logic of Demand which goes down as price rises and Supply which is opposite and goes up as price rises.